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​​What is a Paycard and How Do They Work?

An unbanked employee with a paycard

How do you get wages into the hands of your employees? The old days of counting out cash are long gone. Handing out paychecks or directly depositing funds into employees' bank accounts are the most popular ways to make payments today. But not all employees have bank accounts and you might consider an alternative payment method: pay cards. Paycards, also referred to as payroll cards, are a way for employees without bank accounts to receive their pay.

What is a paycard and who are they for?

A paycard is similar to a debit card. Physically, it's a plastic card that's been loaded with an employee's wages on pay day. The card displays the brand (e.g., Discover, MasterCard, or Visa) provided by the issuer. The issuer is the financial institution providing the paycards.

A paycard can be used to pay an employee who does not have a bank account. Instead of giving a live check, the paycard can be used by the employee to obtain cash and/or pay monthly expenses up to the limit of their wages.

What is an unbanked employee?

According to the U.S. Federal Deposit Insurance Corporation (FDCI), an unbanked employee is a person who does not have a checking or savings account at a bank or credit union. It's estimated that in 2019 about 5.4% of U.S. households were "unbanked."

An employee may be underbanked, which means they have a checking account, but the employee typically uses a check-cashing service and may lack financial wellness. When unbanked and underbanked households are added together, this amounts to 26.9% of all U.S. households.

What are the pros and cons to paycards?

Paycards can be win-win for unbanked employees and their employers. In addition to being a "green" alternative to paper checks, they offer other advantages:

  • Employees have the convenience of immediate payment and don't have to take on the hassle of cashing a paycheck.
  • Because paycards require a PIN, employees have added security that their funds may not be easily compromised. If there is an unauthorized use of funds, the employee may not be liable as long as the issue is reported timely (the reporting period is set by the issuer).
  • Employers have an economical alternative to issuing paper checks. Each pay period, existing paycards are reloaded with current wages. The cost of this payment option to employers works out to be less than issuing paper checks. What's more, it may add efficiency for the employer as it would authorize the payments to employees' paycards and the employer wouldnot have to physically present or mail paychecks to unbanked employees.

There may also be some drawbacks to paycards for employees and employers:

  • Employees may incur fees for certain reasons (explained below). By law, employees must be informed of potential fees. The paycard issuer usually provides this information.
  • Employers have certain responsibilities, such as fully explaining paycards to employees receiving them. This helps employees use them without incurring fees.

Commonly asked questions about paycards

Can employers mandate that employees use direct deposit for wages?

Be sure to check your state's law regarding mandatory direct deposit rules. About a third of states allow employers to require employees to have bank accounts for direct deposit purposes. In such a case, paycards aren't necessary. Nonetheless, employers may want to offer the option instead of imposing the direct deposit requirement.

Can employers mandate that employees accept paycards?

No. Federal law requires employers to offer alternative payment methods and prohibits employers from offering only paycards to unbanked employees.

Some states require written authorization from the employee to pay wages via a paycard.

If employers give employees paycards, do they need to provide pay stub information?

Check on requirements for printed pay stubs. If employers use paycards or direct deposit, they still may be required by state law to provide employees with a pay stub showing their wages, deductions, and  other required information.

Do paycards have fees?

Generally, it doesn't cost the employee to use a paycard. By law, employees must be able to access their wages in full without any fees. This can be done by presenting the card to a bank teller, using an ATM associated with the card issuer, paying bills by telephone, or using the card for point-of-sale purchases.

However, there may be fees for electronic fund transfers or for using ATMs that are not in the issuer's network. Fees may also be charged for replacement cards, balance inquiries, or other reasons.

Can paycards be overdrafted?

Generally, paycards function like debit cards, allowing the holder to use only the funds loaded on them. It is possible for employers to use a paycard program that permits overdrafts to employees. However, this usually is not a good option because there are overdraft fees. What's more, an employee's ability to spend more than what they earn can lead to debt.

What happens if a paycard is lost or stolen?

If a paycard is lost or stolen, a replacement card can be issued. In such a case, the employee should notify the employer, and then the employer should immediately notify the bank. The employee won't be penalized for unauthorized use of the card as long as the problem is reported to the issuer.

Are paycards only for unbanked employees?

There is no law preventing employers from using paycards for employees that have their own bank accounts. However, this usually isn't done because:

  • Employees can use debit cards tied to their own bank accounts in the same way as paycards (and often with less fees).
  • Many employers  find direct deposit to be the most efficient and least costly method of payment.

However, paycards can be used for banked employees to set aside a certain portion of pay as a budgeting tool. In fact, paycards can be issued to family members (e.g., an employee's college-age child) to shift funds efficiently.

Do paycards save employers money?

Paycards can be a money saver for employers. Because payroll can be processed by having the bank reload pay cards with wages for the current pay period, the employer avoids the cost of having to issue paper checks, including costs for re-issuing lost checks and postage for mailing. The savings may not be dramatic, but over time they can add up.

Can paycards be managed online?

Employers can manage paycards online via computer or phone 24/7 through online portals and applications. The funding is authorized electronically so that payments to employees can be done despite extenuating circumstances, such as storms, natural disasters, or other emergencies. For example, during the COVID-19 stay-at-home orders, employees working remotely had their paycards loaded by employer instructions online to the financial institution handling them.

Similarly, employees can manage their paycards online, such as viewing account balances, reviewing transactions, and authorizing online bill pay (e.g., to a utility).

Can paycards be issued instantly?

Employers may be able to have unused paycards ("blanks") on hand and issue one to a new employee upon hiring. This enables an unbanked employee to receive their first wages on time.

Employers can also use paycards for immediately paying final wages.

Will paycards affect employees' credit?

Paycards are like any other prepaid card. It has no impact on an employee's credit score.

Are there any alternatives to paycards?

The basic alternatives to pay cards remain paper checks and direct deposits into an employee's bank account. It's helpful for employers offering all options — paper checks, direct deposit, and paycards — to explain them to employees so that they can make informed decisions about their paycheck options.

Where can employees use paycards?

Employees can cash out wages from paycards at a bank, ATM, or other point-of-service location offering cash back (e.g., grocery stores). Employees may also be able to pay bills over the phone using their paycard number or authorize electronic bill pay to specified companies, such as a property leasing or mobile phone company.

Employees can use paycards at any merchant that accepts debit cards. This includes grocery stores, gas stations, and retail shops.

The bottom line

Paycards can be a useful addition to your payroll solutions. Paychex can help you offer paycards as an employee payment option.

 

barbara weltman
Barbara Weltman is a tax and business attorney and the author of J.K. Lasser's Tax Deductions for Small Business as well as 25 other small business books.
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* This content is for educational purposes only, is not intended to provide specific legal advice, and should not be used as a substitute for the legal advice of a qualified attorney or other professional. The information may not reflect the most current legal developments, may be changed without notice and is not guaranteed to be complete, correct, or up-to-date.

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